Size Does and Doesn’t Matter… More Freight does not translate to lower rates

by David Schneider | Oct 31, 2011

Traditional strategic thinking is to create “volume buying strength,” by which the retail company with their superior buying power is able ship at a lower cost than the vendor. This is the idea that more freight must mean lower costs. This is a bogus assumption based on logic that is tactical, not strategic. Remember, Strategy Eats Tactics for Lunch.

Size does not always equal pleasure. In many cases BIG creates challenges. Rate structures are influenced by many different factors—factors that are magnified in a negative way by too much volume. Lets examine those factors.

Lane Efficiency—Empty Miles: In a truckload environment, the carrier has to be able to get the equipment into position for the load. If things are perfect for the carrier there are loads available at the destination that need to return to the trip origin point, so the carrier has a high efficiency lane and can offer a great rate. But the fickle freight market is seldom perfect, and carriers almost always have some empty mile distance to travel to the next load. Sometimes those loads will deliver close to the original shipper, but usually they do not. The carriers have to add those empty miles into the equation. Shippers that can help a carrier reposition the equipment with fewer empty miles could enjoy a rate advantage.

Lane Imbalance—Not Enough Return Loads: Remember, the carrier has to be able to get the equipment back for the next load. If the shipper cannot help with the backhaul to the head haul, the carrier is sure to charge more for the empty miles. When a shipper sends a lot of trucks into a “freight sink” market where there is more inbound and less outbound without a return load, they are sure to get charged much more. Rates into Miami and Phoenix are an example—if you can book a continuous move out you will see a much lower rate. Rural shippers see this issue all the time, and they pay a steep penalty for being off the beaten path.

These are just two of many examples. There are hundreds of factors that will affect the freight costs. Small shippers can be in a position to get superior rates because of where they can fit into a carrier’s network. It takes a sophisticated shipper with solid carrier relationships to create the advantage. A great relationship with a 3PL transportation company can help; a smart 3PL that handles many accounts can outperform most vendor-managed freight programs.

As I mentioned above, bigger is not necessary better, and more does not automatically mean less. With more of the inbound freight volume under their control Wal-Mart could be in a position to command better rates from their carriers, but I really doubt there is strength in that approach. Wal-Mart is already a huge shipper with a staggering volume of approximately 315,000 inbound loads to Wal-Mart distribution centers every month—that’s more than 3.7 million annual inbound deliveries. Of those inbound deliveries, approximately 150,000 loads are shipped under collect freight terms, about 37% of all shipments.

Wal-Mart already controls 1.4 million inbound loads a year. They already have effectively levered buying power. Would more than doubling the freight volume create more significant rate reductions just because of size? The idea of muscling up even more volume to hammer down rates may be a little presumptuous. There must be other strategies that are being addressed by their effort.

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